African nations see pros to managing oil wealth without transparency

Some African countries say the path to success lies in putting oil revenues into sovereign wealth funds that operate outside public scrutiny.

ByDrew Hinshaw, CorrespondentAugust 12, 2010

An unidentified oilfield worker ties pipes to be raised on an oil rig as the sun sets in the Persian Gulf desert oil field of Sakhir, Bahrain. Exxon has exploration and production operations in Asia, the Middle East, and Africa, which is also looking looking to invest its newfound oil revenues in sovereign wealth funds.

Dakar, Senegal — Congratulations: You’ve been voted President of Angola, successor to President José Eduardo dos Santos, under whose long, long reign the country has boomed into Africa’s top petrol exporter ($16.6 billion in oil revenue projected for this year alone), and the question that The People want to know is this: What are you going to do with all that oil money?

The answer du jour comes in three breezy initials, SWF – for Sovereign Wealth Fund – that are being batted around as the fashionable way for Africa’s petrol powers to invest their oil wealth.

The continent’s top oil exporters, and even some of its newcomers like Ghana, are taking advice from similarly resource-endowed countries that run state revenues through SWFs, many of them in the Middle East and Asia.

Middle Eastern oil giants – whose money managers often tuck away state earnings in safe, if not transparent, investments – may be an example for the continent. "The model works well because they're relatively secretive. You can't say transparency is a golden ticket," Gary Smith, head of central banks, supranational institutions and SWF business at BNP Paribas Investment Partners, recently told Reuters in an analysts of Africa's entry into the SWF market.

A $3 trillion industry

An SWF is essentially a massive, state-held investment fund – something like a 401k for the Nigerian people – that invests in a smorgasbord of assets, whether they be property, currency, sacks of gold, or Goldman Sachs shares.

The one thing they don’t do – and this is where the controversy erupts – is invest that money at home. After all, the Ghanaian cedi, the Ghanaian interest rate, the competitiveness of Ghanaian exports, and the average price of a Ghanaian home, are all wed in sickness and health to the Ghanaian economy. Piping some of that oil money toward a far-off market is a way for the country to protect its revenue far from the vagaries of its national economy.

The funds make up a $3 trillion industry, and the entrance of African oil pumpers could be it’s next big wave.

Benefits of non-transparency

Following the Middle Eastern example would allow states to make long-term investments that may not be as politically popular as they are profitable – channeling revenue toward distant economies where they may ultimately see a better return. Non-transparency would be an added bonus to African nations, as the public would not know what revenue it's missing, and it would also not be aware if the SWF took a short-term loss in favor of a potential long-term gain.

Plus, an SWF can be a slush fund ready to finance massive public works projects in the case of an economic calamity. Should a recession creep in, the government can break glass on their SWF and use the money to fund new roadways and hydrodams to get their people working and their factories humming once more.

Not only that, the fund can increase investor confidence in the ability of a government to repay its debts. Properly managed, governments can use an SWF as one massive chunk of collateral for fetching a more favorable lending rate, should the state wish to float a bond to pay for development priorities.

Yet the system has its critics.

Sending money abroad

For starters, the bean-counters who manage SWFs aren’t obligated to do anything but print plus signs and black numbers on their balance sheets. That means if a local credit-starved industry would grow at a rate of 5 percent with a little investment, but some faraway industry is already expanding at 6 percent, the funds managers are bound to send the money elsewhere.

Secondly, SWF capital takes away money from the here and now. The World Bank, for example, says that African governments need to spend a collective $93 billion each year to rectify a shortage of tarred roads, deep sea ports, and power plants that is costing the continent at least 2 percentage points of annual GDP growth.

Maybe, Mr. President, Angolans of the future would appreciate decades of economic progress fueled by smooth roads and ample power more than a slush fund of oil money stashed in a skyscraper enveloped by generator noise.